(Handelsblatt) Deutsche Bank Earnings Plummet

(Handelsblatt) Shares of Deutsche Bank fell almost 5 percent on Wednesday, approaching its all-time low, after the bank said second-quarter profit was all but erased by its restructuring and ongoing legal problems. The results are stoking fears in Berlin about the bank’s future.

Shares of Deutsche Bank fell almost 5 percent to near its all-time low on Wednesday after Germany’s largest bank reported disappointing second-quarter financial results and signalled its restructuring may take much longer than expected.

The bank said its second-quarter earnings were all but erased by the ongoing costs of its restructuring and its mounting legacy of legal woes, which added another €120 million ($131 million) in costs from April through June. The bank said it took restructuring and severance expenses of €207 million in the quarter.

Net revenue slumped 20 percent to €7.39 billion from €9.18 billion a year earlier. Net profit was a mere €20 million after €818 million a year earlier. In addition to legal costs, which were down from €187 million in the first quarter and €1.2 billion in the year-ago period, Deutsche Bank said it took €285 million in goodwill charges amid transfers of businesses.

Shares of Deutsche Bank were trading down 4.8 percent at €12.27 at 11:30 a.m. in Frankfurt. The bank’s shares have lost nearly half of their value this year, and hit an all-time low of €11.72 on July 8.

John Cryan, the English banker and former UBS chief financial officer brought in a year ago to turn around Germany’s largest bank, signalled he may accelerate his cost-cutting efforts.

“While our results show that we are undergoing a sustained restructuring, we are satisfied with the progress we are making,” Mr. Cryan said. He said the bank needed to shed more unnecessary risks from its balance sheet and modernize its infrastructure.

“However, if the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring,” Mr. Cryan said.

The negative earnings report stoked concerns in Berlin among government leaders over the bank’s prospects.

After years of attacking Deutsche Bank as part of the unacceptable face of capitalism in an increasingly left-leaning Socialist country, German politicians seem to have begun to understand the institution’s dire situation.

The bank’s share price has almost halved since the start of the year and the institution, which employs about 100,000 people worldwide, including about half in Germany, has a market cap of only €18 billion, small for its magnitude.

The earnings released this morning were slightly worse than the negative expectations in the marketplace. Revenue and profit at in its global markets business, its single largest, slumped in the quarter amid ongoing weak global demand and as the bank cut its own staff and resources, and exited many markets.

Revenue in the division fell 28 percent to €2.4 billion from €3.3 billion a year earlier, while pretax profit fell to €28 million from €1.1 billion a year earlier. Revenues in corporate and investment banking fell 12 percent to €1.9 billion from €2.2 billion a year ago, while income before taxes fell 27 percent to €432 million from €595 million.

In its private clients business, revenue fell 11 percent to €1.9 billion while income before taxes fell 61 percent to €187 million from €483 million a year earlier.

Deutsche Bank has been hit hard this year by Brexit.

The German bank has a strong presence in London, and it still isn’t clear how it will cope with the consequences. In addition, Deutsche Bank’s subsidiary in the United States has failed a government regulator’s stress test once again, and the International Monetary Fund views Deutsche Bank as the biggest systemic risk among global institutions.

In off-the-record conversations, representatives of the German finance ministry say they are not surprised by the IMF assessment.

In June, Jens Spahn, the parliamentary state secretary in the German finance ministry, made a barbed comment in a debate with PayPal founder Peter Thiel that Paypal had a bigger market cap than Deutsche Bank.

The bank has long been a target for German politicians, for becoming entangled in numerous financial lawsuits. But the deep resentment among government officials is gradually giving way to very real concerns over the bank’s future.

The German economy needs at least one large bank, which can accompany companies abroad and is well versed in all aspects of the banking business. Deutsche Bank happens to be that bank.

MICHAEL FUCHS
DEPUTY PARLIAMENTARY LEADER, CHRISTIAN DEMOCRATIC UNION

Chief executive John Cryan is for now keeping a low profile in government circles. He made a brief appearance at the bank’s New Year’s reception in Berlin before turning the microphone over to his then co-chief executive JürgenFitschen. He has, however, held official meetings with Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble and financial insiders confirm he is still in regular contact with both.

Mr. Cryan is more than happy, sources say, for the bank to act as an advisor to politicians on everything from the European banking union to the effects of bank regulation, but the views of the bank do not often tally with those of the chancellery.

Deutsche Bank chief economist David Folkerts-Landau called for a €150 billion bailout program to recapitalize ailing European banks, without the participation of private creditors, much to the irritation of Mr. Schäuble who opposes such bailouts.

Deutsche Bank has also changed its stance on regulation, and now wants to be treated differently from its larger, American rivals. Mr. Cryan now argues that “We in Europe should be self-confident enough to establish rules that suit us.” In particular, he argues it is easier for US banks to comply with leverage ratios because of the differences in ways U.S. and European banks put things on their books.

But the head of another German bank argued that arguments like this merely pointed to the fact that “Deutsche Bank has left the concert of global players.”

Parliamentarians from both sides want the bank to haul itself out of the doldrums for the sake of the German economy.

“I welcome the fact that after the bank-bashing of recent years, a different perception is gradually finding its way into politics,” Michael Fuchs, deputy parliamentary leader of the center-right Christian Democratic Union, told Handelsblatt.

He admits that it is important to admit the bank made “serious mistakes,” which contributed to Deutsche Bank reporting a record loss of €6.8 billion in the last fiscal year, but said the bank was also vital to Germany’s economic wellbeing.

“The German economy needs at least one large bank, which can accompany companies abroad and is well-versed in all aspects of the banking business,” he said. “Deutsche Bank happens to be that bank.”

His views now have cross party support. Carsten Schneider, the deputy parliamentary leader of the center-left Social Democratic Party also said he wants to a see a “stable Deutsche Bank,” noting that the German economy needs a bank with international connections. He added that he holds Deutsche Bank Mr. Cryan responsible for “implementing a new business model that is no longer driven by trading.”

If investors were convinced there was a sustainable business model at Deutsche Bank, the share price would not be where it is now

CARSTEN SCHNEIDER
DEPUTY PARLIAMENTARY LEADER, SOCIAL DEMOCRATIC PARTY

Mr. Fuchs, who plans to meet with Mr. Cryan after the summer break, believes former co-chief executive Mr. Fitschen did a great deal to “improve Deutsche Bank’s poor image,” but more needs to be done.

Mr. Schneider is more skeptical about the bank’s track record.

“The bank has made a lot of promises in recent years but hasn’t delivered. I feel a little burned here,” he said.

Alexander Radwan, a parliamentarian with the Bavarian Christian Social Union doesn’t quite trust Deutsche Bank’s change of heart either.

“I have my doubts about Deutsche Bank’s quickly proclaimed cultural change. The money laundering activities in Russia are certainly disconcerting. So where is the improvement?” Mr. Radwan asked.

Investors are apparently asking themselves the same question.

“If investors were convinced there was a sustainable business model at Deutsche Bank, the share price would not be where it is now,” said Mr. Schneider.

Mr. Cryan concurred, saying in an interview with the news magazine Der Spiegel that “many investors are still deterred by the legal disputes.”

 

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At the same time, he rejected the suggestion that Deutsche Bank could be a takeover candidate. It is a still a large bank, he said, and regulators would likely be opposed to a merger of large banks.

Gerhard Schick, fiscal policy spokesman for the Green Party, said it is “of course, very significant when the market value is constantly sinking and an investor like George Soros bets against Deutsche Bank.” For many people, he added, “Deutsche Bank was still the epitome of solidity and stability when the many fraud cases were revealed.”